Question

Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows:

		Maintenance Equipment		Ramp Facilities		Computer Network
Amount to be invested		$731,220		$435,949		$202,282
Annual net cash flows:
	Year 1	300,000		207,000		123,000
	Year 2	279,000		186,000		85,000
	Year 3	255,000		166,000		62,000

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Required:

1. Assuming that the desired rate of return is 10%, prepare a net present value analysis for each proposal. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.

	Maintenance Equipment	Ramp Facilities	Computer Network
Present value of net cash flow total	$	$	$
Amount to be invested	$	$	$
Net present value	$	$	$

2. Determine a present value index for each proposal. If required, round your answers to two decimal places.

	Present Value Index
Maintenance Equipment
Ramp Facilities
Computer Network

3. The computer network  has the largest present value index. Although ramp facilities  has the largest net present value, it returns less present value per dollar invested than does the computer network , as revealed by the present value indexes. The present value index for the maintenance equipment  is less than 1, indicating that it does not meet the minimum rate of return standard.

Answer 1

1
	Maintenance Equipment	Ramp Facilities	Computer Network
Present value of net cash flow total	694659	466465	228579
Amount to be invested	731220	435949	202282
Net present value	-36561	30516	26297
2
	Present Value Index
Maintenance Equipment	0.95	=694659/731220
Ramp Facilities	1.07	=466465/435949
Computer Network	1.13	=228579/202282
3
The computer network has the largest present value index. Although ramp facilities has the largest net present value, it returns less present value per dollar invested than does the computer network , as revealed by the present value indexes. The present value index for the maintenance equipment is less than 1, indicating that it does not meet the minimum rate of return standard.
Workings:
	Maintenance Equipment			Ramp Facilities			Computer Network
Year	Cash flows	PV factor	Present value	Cash flows	PV factor	Present value	Cash flows	PV factor	Present value
1	300000	0.909	272700	207000	0.909	188163	123000	0.909	111807
2	279000	0.826	230454	186000	0.826	153636	85000	0.826	70210
4	255000	0.751	191505	166000	0.751	124666	62000	0.751	46562
	Total		694659	Total		466465	Total		228579